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Stock Ideas Investors Daily Edge Your FDIC Insured Deposits are Safe- Sort Of
Stock Ideas Investors Daily Edge Your FDIC Insured Deposits are Safe- Sort Of 
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| Your FDIC Insured Deposits are Safe- Sort Of |
| Friday, 19 September 2008 | ||||||||
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So far this year there have been nine bank failures. The most notable of the unfortunate few, IndyMac Bank based in California, had depositors lined up for days to withdraw their deposits before the bank officially folded. We are all told that if your bank goes belly-up, that your deposits are safe up to $100,000, guaranteed by the FDIC. And we all sleep better at night knowing this. But what if the FDIC doesn’t really have the money to pay you back for the amount you have deposited? Well, they do and they don’t. First, a little bit of history on the FDIC. The FDIC was created in 1933 after the passage of the Glass-Steagall Deposit Insurance Act. The Deposit Insurance Act itself was brought about due to the panic caused by over 4,000 banks failing that year. In February 2006, President Bush signed into legislation The Federal Deposit Insurance Reform Act of 2005. One of the major outcomes of this law was the merging of the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into the new Deposit Insurance Fund (DIF). The FDIC funds the DIF by charging depository institutions an insurance premium. The premiums the institutions pay is based on the balance of insured deposits as well the degree of risk the institution poses to the insurance fund. Thus, the riskier the bank, the higher the premiums. Due to the recent bank failures the insurance fund balance has dropped to $45.2 billion at the end of June. This caused the reserve ratio to drop to 1.01 percent, below the 1.15 percent required by law. In order to boost the fund balance, the FDIC is considering increasing the premiums charged to banks. Troubled banks, already facing the worst financial crisis since the S&L meltdown, are going to face increased fees at a time they can least afford them. Banks are already setting aside massive amounts in loss reserves to offset future loan losses, so these additional fees are kicking them when they are down. In order to bring the fund back above the 1.15 percent required by law, the FDIC would have to take in approximately $6.11 billion in premiums from the banks in the next few months. This $6.11 billion is needed at a time that banks can ill afford to pay additional fees. And due to the money multiplier it also means that it is $61.11 billion in loans that can’t be made. So this $6.11 billion will directly result in banks not collecting interest payments on over $61 billion in loans, and it means that $61 billion in loans won’t be available to help pull our economy through. And banks desperately need to make these loans to collect the interest on them.
The disturbing part is that the money that the FDIC has collected for the Deposit Insurance Fund isn’t available. During the Johnson Administration, the FDIC’s Deposit Insurance Fund was added to the federal budget as a way of reducing the deficit. So the money that banks pay to the FDIC as insurance premiums just goes into the general government budget, and buys everything from “missiles to school lunches” according to former Treasury Secretary Don Regan. Yes, you read that right. The money hasn’t been sitting in an account at the Treasury to be used as a “rainy day fund”. It bought whatever the government needed the money for. So when a bank such as IndyMac fails and the FDIC needs to cover deposits, it must go to the Treasury and ask for the money. This of course means the Treasury has to borrow it against the budget. And who pays the taxes to finance the budget? We do. So the premiums the banks pay to cover this very situation are already spent and we pick up the tab instead. The banks in essence paid a ‘tax’ by another name so the government could spend it, and we are stuck with the bill. In the case of IndyMac, the bill has approached $9 billion. If WaMu goes down, as is widely speculated, we will be picking that up too, and WaMu is much larger than IndyMac. Christian P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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